£1,000 a month in passive income? Here’s how investors could start with a £20k ISA

Our writer thinks investing in FTSE 100 dividend shares with a £20k ISA could lead to a stable passive income stream down the road.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Trying to pick through all the odd and improbably passive income ideas can be difficult. Rather than try something risky, savvy investors prefer to focus on a tried-and-tested approach.

For decades, British investors have sworn by the regular income that leading dividend stocks deliver. With the FTSE 100 average yield at around 3.5%, the index promises more lucrative dividend income than its US peers.

With a Stocks and Shares ISA, UK residents can invest up to £20k a year with no tax levied on the capital gains. These self-directed investment accounts allow the holder to pick from a wide variety of assets, including stocks, commodities and investment trusts.  

Should you invest £1,000 in Sequoia Economic Infrastructure Income Fund Limited right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Sequoia Economic Infrastructure Income Fund Limited made the list?

See the 6 stocks

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Growing over time

By picking a mix of high-yield stocks, many UK investors have managed to achieve an average yield of around 6%. That would pay only £1,200 a year in dividends on £20k. 

By investing the full £20k each year, within eight years, the pot would reach $231,000 (with dividends reinvested). That would pay £12,000 a year in dividends, or £1,000 a month.

Of course, £20k’s a lot to save every year. But even at half that amount (£10k a year) the same dividend income could be achieved in 12 years.

Choosing stocks

A general rule of thumb dictates that a mix of around 10 stocks provides sufficient diversity in a portfolio. Rather than simply pick the highest-yielding shares, many investors also include some defensive shares or index trackers.

These can help keep a portfolio stable during volatile economic periods. Some defensive stocks also pay a decent dividend, for example, Unilever, with a 3.3% yield, or GSK, at 4.5%.

Naturally, these lower-yielding shares would need to be offset by higher ones to achieve a good average. But very high yields can be indicative of financial problems so it’s critical to dig deeper.

One example

That’s why I like Aviva (LSE: AV). It may have a lower yield than other UK insurers but has a long payment history. I also think it achieves a good balance of allocating funds between the business and dividends.

Looking back, the company has cut dividends several times. This may look bad until you consider how it has used these savings to improve operations. That may be why the share price is up 17.4% in the past five years. Many other UK insurance companies are negative over the same period.

Created with Highcharts 11.4.3Aviva Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Of course, that doesn’t mean it’s without risk. Like most insurers, Aviva invests in fixed-income securities which are impacted by interest rates. If interest rates fall, it could hurt the company’s bottom line. In the highly competitive UK insurance landscape, it can’t risk losing market share failing to impress customers.

But I think it looks to be in a good position. It surprised analysts in its 2024 first-half results, with earnings coming in 10% higher than expectations. Revenue is now expected to exceed £39bn for the year, considerably higher than the £27.4bn achieved in 2023.

I hold the shares as part of my income portfolio and will continue to drip-feed the investment throughout 2025.

Should you buy Sequoia Economic Infrastructure Income Fund Limited now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark Hartley has positions in Aviva Plc, GSK, and Unilever. The Motley Fool UK has recommended GSK and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

Here’s the dividend forecast for Rolls-Royce shares as Trump rocks the markets

Rolls-Royce shares have joined in the volatility over the past week. However, with the direction being largely downwards, the dividend…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Dividend yields of up to 11%! Here are 3 UK passive income stocks to consider

Searching for ways to supercharge your passive income with UK dividend stocks? Here are three that have grabbed our writer's…

Read more »

Young Caucasian woman at the street withdrawing money at the ATM
Investing Articles

£10,000 invested in NatWest shares at the start of 2025 is now worth…

NatWest shares surged into 2025, but things have become a little more complicated in recent weeks. Dr James Fox explores.

Read more »

Investing For Beginners

Why the FTSE 250 could outperform the FTSE 100 for the rest of the year

Jon Smith explains why the FTSE 250 could do better than its big brother when factoring in domestic exposure and…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Tariff fears send the Lloyds share price tumbling, but the dividend yield is climbing

Just when the Lloyds Banking Group share price had been rising steadily, along comes a global upheaval to knock it…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Here’s how a stock market crash could help an investor retire years early

A stock market crash can be alarming -- but for the well-prepared investor, it can also be an exceptional opportunity…

Read more »

Investing Articles

1 key fact to remember in this stock market correction

This writer takes a look at a FTSE 100 investment trust that is catching his eye after the recent massive…

Read more »

Investing Articles

I was wrong about the Tesla stock price!

Tesla stock's been affected more than most by ‘Liberation Day’. But our writer has other concerns about Elon Musk’s company.

Read more »